En extraordinary times, during wars and pandemics or natural disasters, politicians take extraordinary measures to mitigate the economic and social shock suffered by their fellow citizens. Shortages of natural gas due to the war in Ukraine have thus forced some countries to turn to coal. Governments cannot be blamed for protecting households that experience energy insecurity. If appropriate measures are taken, a further acceleration of decarbonisation remains possible and will make it possible to compensate for the current setback.
On the other hand, the decision to lower taxes on energy and fuel is more difficult to understand. A majority of G7 member countries – Canada, Italy, France, Germany and the United Kingdom – have nevertheless taken this step, and similar measures are receiving public support in Central and Eastern Europe. .
By subsidizing fuel, we reduce incentives to save energy and we create a distortion of the price signal that is essential for the transition to a more low-carbon economy. The burden on public finances is also much heavier than that of means-tested social transfers to vulnerable households. But massive subsidies are simpler to implement and more popular with voters.
The Ukrainian example
Likewise, while the poorest households are the ones who need help to cope with rapidly rising interest rates, governments are tempted to help everyone else. The Polish government, for example, decided on 7 July 2022 on a general moratorium on debt servicing, thus allowing its fellow citizens who have taken out a mortgage loan for their “own use” to suspend their repayments for eight months. This measure will disproportionately benefit the owners of the most important assets. It could also weaken the transmission mechanism of monetary policy by limiting the effects of rising interest rates on economic activity, and thus forcing the central bank to raise them even further.
In contrast, the “Borrower Support Fund”, which Poland also expanded in 2022 to help those who have lost their jobs or face borrowing costs above 50% of their income monthly, is a much cheaper and more rational measure. By extending its beneficiaries to a greater number of households in difficulty, policymakers could avoid many of the distortions mentioned above, while protecting the most vulnerable. Admittedly, such a strategy does not offer the same breath of fresh air during an election period.
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